Teva: Caution Is Warranted

In early August, I wrote an article recommending Mylan (MYL) instead of Teva Pharmaceutical Industries (TEVA) for those who would like to play the possible recovery in the generic drugs field. The price gap between the two was $12.32 (Mylan-Teva at $32.92-$20.60). Before yesterday's strong rebound, the price gap widened to $16.59 (Mylan-Teva at $32.10-$15.51 - prices as of the market close on September 8). At the time of writing, the price gap has narrowed back to $14.40 (Mylan-Teva at $33.59-$19.19) as the shares of Teva experienced a sharp rebound yesterday.

Teva closed 19% higher following the announcement of an industry veteran, Kare Schultz, as the incoming president and chief executive officer. The share price continued its march upwards today as the market cheered the sale of PARAGARD (an intrauterine copper contraceptive) to CooperSurgical for $1.1B in cash. The transaction was deemed to be highly favorable to Teva at a transaction value to sales ratio of 6.5x (given that PARAGARD generated an annual revenue of around $168 million), compared to the overall Teva at just above 1x (market cap to sales ratio).